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In 2016, nearly 3 billion people – or half of the total population on our planet – watched the Rio de Janeiro summer Olympic Games. In the United States, 27.5 million people watched the opening ceremony, and audience rating peaked at 19 when the U.S team entered the field. Meanwhile, the International Olympic Committee reports that the level of support for hosting the Olympic Games in Rio de Janeiro reached 85%. Despite of the popularity, the number of countries that bid to host the summer Olympic Games has decreased since 2008 as the following graph shows.

The major driving force that leads to this paradox is the recurrent financial lost. Data shows that net profits earned by host countries, from 1996 to 2016, were: -1.776, -1.633, 0.828, -1.905, -7.716 and 2.418 billion US dollars. Or in other words, four out of six countries faced financial losses after the game, including a 7.716 billion loss in London 2012. It is clear that there is a huge financial risk for cities that want to host the summer Olympic Games to take. Recurrent financial loss also comes with byproducts such as a lower approval rate for hosting future Olympic Games and severe brand damage. All of these negative factors make cities and countries wonder if holding the Olympic Games is a wise move.

Reasons for the loss

Though multiple forces may contribute to the recurrent loss, cost overrun has the most significant impact on this issue. There are two types of cost involved with the Olympic Games – direct costs and indirect costs. Direct costs cover sport-related expenses. Indirect costs cover construction projects and upgrading programs that are not sport-related but necessary for the local government to accomplish the predetermined goal.

According to Professor Bent Flyvbjerg’s report, the Olympic Games have the highest direct cost overrun, at 156 percent in real terms, compared with that of any other type of mega-project. Moreover, that report also demonstrates that cost overrun is found in all Games, without exception. Indirect cost overruns were stunning as well. Sochi, host city for the 2014 winter Olympic Games, had an initial budget in the range of 11 billion US dollars. By the end of the ceremony, however, the total cost of the games was over 50 billion US dollars, among which 79% were indirect costs. Ideally, a greater amount of investment will lead to a greater yield of return. Practically, that’s not the case. The logic behind Sochi’s sky-scraping indirect cost is that Sochi wanted to use the winter Olympics as a springboard to reintroduce itself as an international resort. Indeed, Sochi experienced hotel price boosts after the 2014 winter Olympic Games. The number of tourists registered in the official accommodation venues increased from 1.2 million in 2014 to 1.4 million in 2015. Revenue during the same period increased from a little above 320 million to 380 million. However, because of the unbelievable cost overrun, Olympic debt and its interests became a huge burden for the local government. As economist Martin Müller said, “At 8.5 percent of current interest rates, just servicing the debt would require a massive $4.4 billion profit per year. Each citizen of Sochi would have to contribute $10,500 per year. Alternatively, Sochi would have to attract 4 million additional tourists per year that each generates $1000 in taxes.” It shows that financial risks should be taken into account even if the Olympics boost certain industries.

Given the fact that cost overruns have such significant impact on financial loss, it is clear that the International Olympic Committee (IOC) needs to build internal and external audit systems to help cities better control their budgets. The sooner IOC builds such systems, the sooner the Olympic Games can revive.